Business entertainment tax deductions are gone: What you need to know

Before the federal tax overhaul, business meals and entertainment were generally deducted at 50 percent. Now, meals remain generally 50 percent deductible. Entertainment does not.

The changes are only to select expenses, but some companies were taking large deductions to entertain clients, which could impact their taxable income.

“This affects everybody from a sole proprietorship to a large multinational company,” says Melissa Knisely, CPA, Tax Department Senior Manager at Ciuni & Panichi, Inc. “We’ve known about the changes and have made clients aware. The recent guidance has enabled us to clarify some of the previous unknowns.”

While this change under the Tax Cuts and Jobs Act (TCJA) was effective Jan. 1, 2018, the IRS recently provided some interim guidance while we wait for proposed regulations.

Smart Business spoke with Knisely about what taxpayers need to consider with the revised meals and entertainment deduction, including interim guidance from the IRS.

What exactly will need to be treated differently and what remains the same?

The two exceptions allowing entertainment to be deductible were repealed as of Jan. 1, 2018. So, all entertainment, amusement or recreation activities are now nondeductible. Theaters, clubs, lounges, tickets for sporting events, skyboxes, transportation to and from sporting events, cover charges, taxes, tips and parking for entertainment events would all be considered part of entertainment, amusement or recreation.

The TCJA clearly addressed entertainment, but meals were not specifically addressed. Recent interim guidance from the IRS did, however, provide some clarity. Business meals can continue to be deducted at 50 percent, provided they meet five qualifications:

1. The expense is an ordinary and necessary business expense paid or incurred during the tax year when carrying on any trade or business.

2. The expense is not lavish or extravagant.

3. The taxpayer, or an employee of the taxpayer, is present when the food or beverages are furnished.

4. The food and beverages are provided to a current or potential business customer, client, consultant or similar business contact.

5. For food and beverages provided during or at an entertainment activity, they are purchased separately from the entertainment, or the cost of the food and beverages are stated separately from the cost of the entertainment on one or more bills, invoices or receipts.

This last point is particularly important. It means if the meal is part of the entertainment, such as a baseball game, taxpayers must pay for the entertainment separately. In cases where the food is included with the ticket to the game, the food would only be deductible if separately stated on the ticket or invoice.

What are companies doing now to comply?

It’s mostly a matter of understanding what’s happening and then making sure it’s being accounted for in such a way that it is easy to determine what is deductible for tax purposes and what is not.

In the past, businesses had one trial balance account for meals and entertainment. Now, they need to review their 2018 activity to ensure that food and beverage is stated separately, while recording invoices to two separate accounts — one to meals, one to entertainment.

How are calendar and fiscal year filers handling this differently?

If you have a business that is a calendar year-end filer, you’ll follow the new rules for the entire 2018 calendar year. If you have a business that follows a fiscal year end, you’ll follow the old rules for the portion of the year that falls in 2017 and you’ll follow the new rules for the portion of the year that falls in 2018.

What else is on the horizon for meals and entertainment deductions?

Currently, there’s a 50 percent deduction for meals for employees’ benefits, such as coffee, doughnuts, overtime meals or occasional group meals, as well as the expenses of an employer-operated eating facility. In 2026, if nothing changes, food at the office won’t be deductible. This will be something companies should keep an eye on.

Insights Accounting is brought to you by Ciuni & Panichi, Inc.

There are many benefits to the newly created Opportunity Zones in Ohio

Established with the Tax Cuts and Jobs Act of 2017, Opportunity Zones are low-income census tracts nominated by governors and certified by the U.S. Treasury that are intended to provide preferential tax treatment for investment.

“Opportunity Zones are built to provide significant tax advantages to investors into stock, businesses or property located in a Qualified Opportunity Zone,” says Graham Allison, CEO and co-founder of Opportunity Zone Development Group, a Clarus Partners associate.

Smart Business spoke with Allison about these innovative federal tax incentives, and how businesses, investors and communities can take full advantage of them.

Who benefits, or at least stands to benefit, from an Opportunity Zone?

Opportunity Zones were made with bipartisan support as an economic development tool to create jobs in emerging markets. They’re designed to attract some of the estimated $5 trillion in unrealized capital gains to these underserved areas. If they perform as expected, neighborhoods will benefit from added investment and job creation, and investors will benefit from significant tax incentives.

For investors, there are the following benefits:

  • Upon sale of an asset, the investor defers the capital gains tax until the sale of the subsequent investment or December 31, 2026, whichever comes first.
  • If the business holds the asset for five years, there is a step up in basis of 10 percent.
  • If the asset is held for seven years, there is an additional step up in basis of 5 percent, before the tax payment becomes due on April 15, 2027. Essentially, an investor pays 85 percent of the original tax due up to eight years later.
  • If the asset were held for at least 10 years, there would be no tax on the appreciation of the asset. While this incentive is like a 1031 Exchange for real estate, it ends the cycle of transfer of assets between like-kind property and allows an investor to realize the entire gain.

Who can invest in an Opportunity Zone and what should investors expect in return?

Investors that can participate include individuals, corporations, businesses, REITs, and estates and trusts that invest through a Qualified Opportunity Fund. A Qualified Opportunity Fund is a partnership or corporation that maintains 90 percent of its assets in a Qualified Opportunity Zone.

Investors can sell a real estate property, business or stock and reinvest it in a Qualified Opportunity Fund to acquire Qualified Opportunity Zone assets. Opportunity Zones enhance returns as investors can utilize funds they would have otherwise paid in capital gains taxes to obtain real estate cash flow, grow a business or gain dividends on stock.

The greatest benefit comes when selling the asset after 10 years as there would be no tax on the appreciation of the Qualified Opportunity Zone asset. That represents a significant tax savings on gains.

Where are the Opportunity Zones in Ohio or where are they expected to be once they’re created?

Ohio has 320 census tracts designed to promote investment in low-income areas. Ohio was permitted to submit up to 25 percent of its eligible census tracts and 73 counties contain these eligible zones. A map of eligible Opportunity Zones can be found at opportunityzonedevelopmentgroup.com.

What should the investor communities know about Opportunity Zones before committing to invest in one?

Investors should talk with their tax professional before committing to an investment in an Opportunity Zone. While the Opportunity Zone incentive is very flexible, it requires strict compliance to ensure it is actualized.

Insights Accounting is brought to you by Clarus Partners

Demystifying Industry 4.0 for business owners and manufacturers

The term Industry 4.0 continues to mystify many business owners, but it’s less complicated than it sounds.

“People think it’s a large, complex and expensive transformation that only big companies can do. That’s not the case at all,” says Eskander Yavar, national leader of Management & Technology Advisory Services at BDO USA, LLP.

While U.S. companies are behind Europe and Asia on this, the wave is starting to break as everything becomes more digitized.

“There could be a point, in the next five to 10 years, where if you’re not doing it, you’re slowly dying,” he says.

Smart Business spoke with Yavar about what Industry 4.0 is, examples of how it has helped companies and how to get started.

What exactly is Industry 4.0?

It refers to the fourth industrial revolution. The first revolution was the advent of steam and water power to drive machinery in factories, which enabled less manual effort in the 18th century. The second revolution was how electricity changed the factory floor, which brought globalization and mass production in the 19th century. The third revolution was the introduction of computers, the internet and automation. This next revolution combines artificial intelligence (AI), data, the cloud — which is just off-site computers — 3D printing, etc.

It’s not a total transformation that’s cost intensive. It’s not reinventing every company. It’s about understanding the technology and the availability of data and connectivity through internet-enabled devices, so new technologies can solve a business problem. For example, you can improve on-time delivery by managing the end-to-end supply chain process through data, an analytics platform, radio-frequency identification tags and sensors.

Industry 4.0, and its ability to deliver data about demand-curves, buying behaviors and other critical patterns and predictions, applies to all manufacturers, from process-oriented and repetitive, to build-to-order. It enables them to gather greater business intelligence and develop customizable products on a mass scale. It accelerates the decision-making process and improves speed to market.

What are some examples of how Industry 4.0 can drive business results?

One manufacturer makes traffic signal preemption hardware so public safety and emergency vehicles can change red lights. It historically wouldn’t come back to customers unless it was time to service or upgrade that hardware. This manufacturer noticed its network threw off data about traffic conditions, how many times a vehicle caught a green light and other metrics. The company took that data and built an analytics platform in the cloud. Then, it sold the data in its desired state for compliance reporting to generate monthly revenue.

In another example, a transportation company had cargo ships going off course during their auto-pilot controlled routes. Because of the anomalies, ships were late and fuel costs rose. The amount of data that needed to be crunched to identify the issue was on such a large scale that the company used an AI algorithm to analyze the data to discover where anomalies were occurring. Then, the company implemented sensors on those ships, so it could autocorrect the errors as they were happening.

How should businesses get started on this?

Do a quick assessment of your technology, processes and connectivity, from a maturity perspective, to ensure the environment is right to introduce something different. Then, look for a use-case — a small proof of concept project — so you can get a quick win with better operational and financial results. Perhaps, it’s tackling a through-put at a certain point on the shop floor by adding sensors and analyzing that data. Then, over time, as you prove out every use case, you end up with larger upside.

Some businesses are already doing this, but don’t call it Industry 4.0. There are a lot of options, too: everything from a fully integrated digitized environment throughout the organization, to systems you don’t have to pay for. However, remember that while it involves technology, data and cloud, it’s not an IT project. It involves change for people and technology. The CIO shouldn’t be driving the transformation; it’s the operations or plant manager who understands inefficiencies in your environment, with executive team support.

Insights Accounting is brought to you by BDO USA, LLP

Budgeting, forecasting for a business and how it impacts personal finances

The personal lives of business owners, especially those with smaller companies, are intertwined with their business as long as it’s in existence. It’s a means of support for family expenses and their lifestyle.

Good budgeting and forecasting for business owners and their companies are critical to achieving the goals of each.

“A lot goes in to budgeting and forecasting, but when the business fiscal year ends, it’s a brand new ball game. Questions need to be answered before it begins,” says Michael Van Himbergen, CFP®, a financial advisor at Skoda Minotti.

“Review your financial situation and the financial situation of your business annually to make sure any obstacles — anticipated or otherwise — are handled before the end of the year so they don’t become roadblocks.”

Smart Business spoke with Van Himbergen about what to include in annual financial reviews and why they’re important.

What are the major considerations business owners should make as they budget and forecast?
Every goal needs a timeline, whether short- or long-term. Consider inflationary factors — the longer the timeline to achieve the goal, the greater the impact of inflation — and establish a target rate of return for each goal.

Make sure you’re paying yourself first out of business revenue. Calculate that as an expense and build it into the budget every year.

Establish a retirement plan for yourself and your employees if you haven’t already. There are a number of factors that determine what type of plan is best to implement, such as the number of employees, their average age, employer and/or employee contributions, to name a few.

If you want to cover college expenses for your children, the longer you wait, the more it costs. Families need to save $500 to $600 per month (per child) from the time their child is born to get them through four years of an in-state public university.

However, take care of yourself first to make sure you’re on track for retirement before funding for a child’s education. Children will have their entire productive lives to pay back student loans. You can always help out down the road.

Also, don’t forget to plan for weddings, big vacations and any other major purchases, accordingly. And it’s always prudent to have three to six months of monthly living expenses to cover an emergency.

How frequently should business owners review their business and personal finances?
Every year. Is your plan doing what it’s supposed to? Review the company 401(k) with employees. Is participation low? If so, determine the reason they’re not participating and educate employees on the benefits of the plan.

Always review income projections. A cash flow analysis will show you whether income is stable or fluctuating.

Review personal investments at least annually unless there are significant changes that would affect longer-term planning. If that’s the case, talk to your financial advisor/accountant to determine how that life-altering event could affect your long-term financial goals.

What, generally, are some ways to adjust to the new financial realities that follow a life-changing event?
Changing jobs, death or disability, death or disability of a partner or a key employee, having children, getting married or divorced are common life-changing events. When these events happen, it’s important to determine how they impact your financial plan.

Any of these can affect cost of living, the level and type of insurance protection that’s prudent, and how much money is available to save and spend. Regardless of what’s happened, it’s important to stick to a financial plan and make adjustments as needed, rather than stop saving altogether.

Unexpected aside, define your goals to determine the level of risk that’s prudent given your situation and the goal you’re trying to obtain. Review your circumstances at least annually with your financial advisor, both in terms of what’s going on in your life and in your finances, and you should have no trouble achieving your goals.

Insights Accounting is brought to you by Skoda Minotti.

Tips on identifying and reporting fraud in your organization

Fraud happens in businesses of all types, sizes and levels of sophistication. Though it can occur at any level of an organization, fraud more frequently happens at the management level or above. A 2014 report by the Association of Certified Fraud Examiners (ACFE) found that 36 percent of those who committed fraud were mid-level managers. Most were male and 87 percent were first-time offenders.

“Upper-level employees are more likely to be entrusted with sensitive information and may be able to override controls,” says J.W.Wilson, CPA, a partner in accounting and auditing services at Clarus Partners. “However, having a profile of a common perpetrator isn’t enough for an organization to stop fraud.”

Smart Business spoke with Wilson about fraud, its effect and what organizations can do to detect and mitigate it.

What are the more common types of fraud and what can they cost an organization?

There are two categories of fraud that are most common: misappropriation of assets and misstatement of financial statements. Asset misappropriation is a scheme through which employees steal or misuse an organization’s resources — for instance, false billing, inflated expense reports or outright theft of company cash. Misappropriation of assets is the most common, but it’s the least costly, averaging around $130,000 per loss.

Financial statement fraud is a scheme through which employees intentionally cause a misstatement or omission of material information in the organization’s financial statements. That could mean recording fictitious revenues, understating expenses or artificially inflating assets. Though financial statement fraud is the least common type of fraud, it’s the most costly, averaging $1 million per loss.

In general, fraud costs businesses in the U.S. billions of dollars each year. Typical acts of fraud costs businesses between $10,000 and $500,000. But in addition to costing businesses money, fraud also hurts productivity and company morale. Fraud can damage the reputation and customer relationships of the business, which can take significant time and energy to repair.

How is fraud typically detected?

Most often fraud is detected by an employee of the organization who then reports the fraud to someone internally.

Because staffers are most likely to identify and report fraud, it’s a good idea to put in place a fraud hotline or reporting system. In making employees aware of the hotline, consider communicating to whistleblowers that they will be protected from any reprisal, and that they could earn a financial reward if they’re willing and able to give useful information to law enforcement.

What are internal control reviews?

An internal control review is an overall assessment of the internal control system and the adequacy of that system to address the risks of the organization. They can highlight weaknesses in a company’s internal control structure or expose processes that could be strengthened to maximize efficiency. Detailed recommendations would be given to help mitigate risk or strengthen areas of identified weakness.

Most often, a company’s board, the owner or CFO requests internal control reviews. But it’s a good idea to perform a review every three to five years or more often if there is significant change in the company.

What should companies do once they have the results of their internal control review?

Management should work to implement the recommendations pulled from the findings of the internal control review and ensure that they are in place. Going forward, management should regularly communicate reminders of policies and procedures to the company, and periodically review the procedures and check that they are consistently being followed.

Research by the ACFE indicates that the typical organization loses 5 percent of revenues each year to fraud. While that 5 percent is certainly a chilling average, consider that the median losses from fraud for businesses with less than 100 employees are around $147,000. A loss of that size could be devastating for a midsize business.

Companies should understand that fraud could happen anywhere. Strong internal control policies and procedures are the best way to help minimize this risk.

Insights Accounting is brought to you by Clarus Partners

Oversight is needed to mitigate occupational fraud

Business owners, board members and other key stakeholders should give more consideration to what their organization is doing to prevent fraud, says Laurie A. Gatten, CPA, CFE, a director at Barnes Wendling CPAs.

“It’s concerning when I begin initial discussions with owners or other key stakeholders regarding internal controls, and when I ask them how they identify risks of fraud and what measures are put into place to mitigate those risks, the answer returned is, ‘That’s why you’re here as our auditor,’” she says.

Smart Business spoke with Gatten about occupational fraud and the internal controls that can mitigate it.

What is occupational fraud and what forms does it typically take?
Occupational fraud is the use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of an organization’s resources or assets. It can be as simple as theft of company supplies or as complex as sophisticated financial statement fraud or corruption.

Asset misappropriation, corruption, and financial statement fraud are three types of occupational fraud. Asset misappropriation is by far the most common, but the least costly with a median loss of $114,000. The least common type of scheme, but most costly, is financial statement fraud with a median loss of $800,000.

What are the signs that fraud is occurring?
In most cases, fraudsters display at least one behavioral red flag and sometimes they exhibit multiple red flags.

The six most common red flags are:
  Living beyond their means.
  Financial difficulties.
  Unusually close association with vendors or customers.
  Control issues and an unwillingness to share duties.
  Divorce or family problems.
  A ‘wheeler-dealer’ attitude.
The leading detection methods are tips from employees or others, internal audit, and management review and oversight. More than half of all tips are provided by employees, but tips can also come from people outside of the organization, such as customers, vendors, and competitors.

What should happen once fraud is detected?
Once fraud is suspected or determined to have occurred, the perpetrator should be immediately removed from his or her position. The company should consult legal counsel and a certified fraud examiner. The attorney will assist on human resource and other legal matters, while the certified fraud examiner can quantify the losses, present investigation findings, and assist in developing proper controls to deter future fraud.

What steps can companies take to mitigate occupational fraud?
The first step an organization should take is actually implementing a fraud mitigation strategy. It’s really important for everyone to understand that management is responsible for implementing a sound internal control structure. While having an external audit is one way to measure a certain amount of effectiveness of a fraud mitigation strategy, the auditors cannot be part of a company’s internal control structure.

How can an organization test its fraud mitigation strategy to ensure it’s effective?
The best way to test the effectiveness of a fraud mitigation strategy is to have an ongoing monitoring process in place to evaluate it.

There are several measures to incorporate into a monitoring process, but most important are:
  Establishing a third-party hotline where suspicious activity can be reported without reprisal. Ensure all employees are aware it exists and know how to access it.
  Communicating anti-kickback policies to vendors, customers, and other outside parties.
  Jobs rotations, mandatory vacations, and determining if proper segregation of duties is in place.
Everyone in an organization is busy and it is easy to let certain internal controls go by the wayside. Continuous monitoring is key to ensuring the internal controls structure remains strong and is effective.

Insights Accounting is brought to you by Barnes Wendling CPAs

How to navigate the state sales tax landscape after the Wayfair decision

As e-commerce grows, states have become increasingly unhappy with how sales and use taxes are collected on remote retailers. A recent U.S. Supreme Court decision, South Dakota v. Wayfair Inc., however, dramatically changed the landscape for sales tax nexus, and the obligation to file and report taxes.

“It’s not Armageddon, but you may need to start filing in a handful or more states in the coming years,” says Mike Feiszli, managing director of state and local tax at BDO USA, LLP.

Smart Business spoke with Feiszli about what’s next for companies.

What’s the background on the Wayfair case?

Nearly 30 states created non-standardized statutes with economic nexus standards for sales tax. They sought to get around the nexus standard that a remote seller needs a substantial physical presence within the state to be subject to that state’s sales tax laws and reporting requirements, which the Supreme Court reaffirmed with the 1992 case, Quill v. North Dakota.

In 2016, South Dakota decided that a retailer that sells $100,000 of tangible personal property or services, or completes 200 transactions, has enough business activity to be subject to its sales tax law. The law was challenged by Wayfair and two other internet sellers in the South Dakota courts, with the lower level courts holding for Wayfair, due to the Supreme Court precedent. The Supreme Court was petitioned by the state and decided in June, 5-4, in favor of the state. It reversed Quill, finding that physical presence is an incorrect interpretation of the commerce clause and isn’t required for substantial nexus. It didn’t define what the nexus standard should be — leaving that to a stalled Congress — but it does consider South Dakota’s economic standard to be reasonable.

Have other states reacted yet?

Some states already had standards similar to South Dakota, and many of those became effective over the summer. About a dozen other laws will become effective soon. If a state had an economic nexus standard prior to Wayfair, the Supreme Court didn’t encourage retroactive enforcement. A few states, Ohio and California, for example, have higher nexus limits than South Dakota, while Pennsylvania has a nexus standard of $10,000. Many states, including Ohio, will likely start aligning more closely with South Dakota’s law.

What does this mean for businesses?

To any business owner not currently registered in multiple jurisdictions in the U.S., be aware that the landscape has changed. It’s no longer a matter of whether you have a salesperson or warehouse in a jurisdiction. If you have a certain amount of sales or transactions, states probably have, or will have soon, a law in place that will require you to register and start reporting sales and charging sales tax.

If your company believes it only has exempt sales or that because it only provides services, Wayfair won’t affect its business, that’s not necessarily the case. States will look at gross receipts that are sold into the state and expect you to register once you hit a threshold. You’ll need, at a minimum, to begin filing returns and reporting sales activity. You will also need to document exempt sales and keep exemption or resale certificates, while remembering that state’s rules vary on exemptions as well as acceptable documentation. If proper documentation isn’t kept and you’re audited, those sales could become invalidated and you as the seller may be on the hook for tax that likely should have been the purchaser’s burden.

There will certainly be a compliance cost to the court’s decision.

So, what needs to occur now? You need to do a self-analysis. States won’t immediately know you’re over because they’re not geared up for this change either — as much as they wanted this decision. However, they can and will eventually find out through audits of the purchases of your customers in their state and by cooperating with other states or governmental agencies.

Your tax adviser can help you determine the pressure points, the aggressive states, who is likely to be auditing companies soon and who is not. It’s like any business decision — go through the analysis, determine where you have issues and then decide on a plan that fits your risk tolerance and budget.

What else is important to know about the Wayfair’s long-term impact?

There are many unanswered questions, like how the decision affects international business. At some point, these cost burdens will likely be reflected in prices, and brick and mortar stores may find themselves on a more level playing field with internet businesses. As tax laws change, you’ll also want to keep an eye on whether this affects income tax or other state and local tax compliance in other jurisdictions.

Insights Accounting is brought to you by BDO USA, LLP

The new revenue recognition standard: Don’t try this without a safety net

Soon, it will be easier for users of financial statements to compare companies. But as this new revenue recognition standard comes on line, there may be some growing pains for businesses.

George Pickard, CPA, MSA, principal in the Audit and Accounting Service Department at Ciuni & Panichi, says the new revenue recognition standard is a joint project between the Financial Accounting Standards Board, that establishes financial accounting and reporting standards for entities following U.S. Generally Accepted Accounting Principles (GAAP), and the International Accounting Standards Board, which establishes such standards for entities following international financial reporting standards or IFRS.

Smart Business spoke with Pickard about the new revenue recognition standard and what business leaders need to know.

What changes under the new standard?

It gives everyone core accounting rules for recognizing revenue when they enter into contracts with customers to provide goods or services, so there’s better comparability across entities, industries, jurisdictions and capital markets. It makes it easier to analyze a company through its financial statements and provides more disclosure for users of financial statements.

Companies will use a five-step process for recognizing revenue:

1. Identify all customer contracts to provide goods or services, whether written, oral or implied by customary business practices.
2. Define the performance obligation(s) within that contract. Are there multiple steps with different deliverables?
3. Determine the transaction price.
4. Allocate the transaction price across the different performance obligations.
5. Recognize revenue as each performance obligation is satisfied.

Many companies will recognize revenue sooner; before they might have recognized revenue upon completion of the contract.

When does the new revenue recognition go into effect? Are there exemptions?

Public entities, certain not-for-profits and certain benefit plans are implementing it for the 2018 calendar year — if they have not already done so. For all other entities, it will be effective for 2019 calendar year items.

Transactions that follow other standards are exempted. Examples include lease contracts, insurance contracts, financial instruments and guarantees.

How should business leaders act?

Even private companies should look at this now. Encourage your CFO and accounting department to be proactive and ask for help. Get your system up early, so it can capture the information you’ll need for decision-making or the different disclosures. That way, you’re not rushing around or incurring higher costs than necessary. Also, this is retroactive. If your 2019 reports compare to the previous year, you’ll have to restate the 2018 numbers to comply with the new rules.

Identify all of your revenue streams and contracts to see how things might change. Your human resources and/or IT department may need to get involved. In addition, look at your loan covenants and grants to determine if any reporting obligations are tied to revenue. You don’t want to trip a covenant and then start having conversations with your bank.

Where will biggest obstacles occur?

You may need to change your systems, which could be time consuming and costly. It may not just be your accounting system, but also the system, let’s say, on your manufacturing floor.

Of the five steps, determining the transaction price will be the most difficult piece. Do you have variable consideration, such as a bonus for early completion? If so, it may need to be recognized earlier. Are you getting paid in non-cash? For items like stock, when do you recognize it and how much should it be valued at? Could there be a financing component? If you’re not going to be paid until two years down the road, is that interest income? Do you give discounts or rebates and how will those be considered?

Recognize the issues and start having conversations with your bank, your accountant and internally. You may decide to simplify your contracts. You may need to change your bonus policy if it’s tied to revenue. It will take time to adjust, so the sooner you start, the better.

Insights Accounting is brought to you by Ciuni & Panichi, Inc.

How business is made better with a strong accountant relationship

While very few businesses operate without tapping into the services of an accountant in some shape or form, some businesses aren’t using the relationship they have with their accountants to the fullest.

“Some business owners might just go to their accountant for tax advice, but what they don’t realize is that they could use them for much more,” says Nancy Supowit, director at Clarus Partners.

She says accountants are trusted business advisers and many business owners talk regularly with their accountants regarding issues that range from strategic planning, purchasing real estate, entering a new market or estate planning. Others, however, might not think to reach out and get advice from their CPA.

Smart Business spoke with Supowit about how business owners can get the most out of their relationship with an accountant.

What issues might arise if business owners don’t regularly engage their accountant?

Some businesses don’t keep good financial records during the year. That means the accountant gets books at tax time that are in bad shape, so it takes a lot more effort at the end of the year to sort out the information. That should be a concern for business owners, not just because it means they’re paying their accountants for more billable hours, but because they’re using poor or incomplete information during the year; and basing decisions on what is likely an inaccurate picture of the business’s situation.

Undertaking debt financing or relocating without first talking to an accountant could lead to a non-optimal decision. Had the idea been run past an accountant, he or she could have helped identify the best type of debt for the situation, or find a tax offset that would reduce the cost of a move.

What is it business owners might misunderstand about their relationship with their accountant?

There are different types of accountants for different needs. Sometimes knowing which type of accountant can address specific issues is pretty clear — for instance, if a company has a tax issue or a tax filing need, it should go to an accounting firm that has expertise in tax. However, what might go unrecognized is that accountants offer other services and specialize in many areas of expertise that could benefit a business.

Business owners’ professional and personal lives are commingled. So as important as it is to keep an accountant informed about what’s happening in a business, it’s equally important that the accountant knows what’s happening in an owner’s personal life. For instance, an accountant should be informed if there is a change in marital status as it could have a significant impact on the business or the estate. An accountant can also be a valuable adviser when it comes to retirement and succession planning.

What does a good relationship with an accountant look like?

Ultimately, the tone and frequency of conversations with an accountant are up to the business owner. While a good accountant will check in and ask questions to find out what’s going on, it’s up to the business owner to make the time for that conversation.

At a minimum, business owners should talk with their accountant at tax time about what’s happening in the business — is it expanding, contracting, changing locations, planning to acquire another company? It’s also a good time to update the accountant on any personal life changes.

Though talking with their accountant at tax time is important, it shouldn’t be the only conversation of the year. Year-round expert advice could prove valuable if implemented.

Business owners should strive to have a healthy, ongoing relationship with their accountant, who in turn should genuinely be interested in the state of things and work to understand as much as possible about the business. The comfort level should be such that the business owner feels welcome and free to talk. What form those conversations take — coffee each week, a quarterly call — is up to the business owner.

Insights Accounting is brought to you by Clarus Partners

Ruling brings major change to out-of-state sales tax collection

For many years, businesses had to have physical presence or nexus in a state to be legally required to collect and remit sales tax on transactions. E-commerce has essentially skirted that law and states have argued that they’re losing out on tax revenue they’re due. They challenged the court cases that set the physical presence standard — Quill Corp. v. North Dakota and National Bellas Hess v. Department of Revenue of Illinois — to little avail. Finally, with the recent South Dakota v. Wayfair Inc. decision, states have gotten the ruling they were hoping for. And it means significant changes for businesses that do out-of-state business, whether online or not.

Smart Business spoke with Nicholas Schatte, tax manager at Clarus Partners, about the Wayfair decision and how it affects businesses of all types and sizes.

What is the decision the Supreme Court reached in the Wayfair case?

The Supreme Court, in a 5-4 decision, overruled the standards set forth in Quill and Bellas Hess. Now, a physical presence is no longer a prerequisite for states to compel a business to collect and remit sales tax. All applicable transactions can be taxed.

As it stands, the Supreme Court sent the decision back to South Dakota’s Supreme Court to be evaluated for any reason that it might be unconstitutional. It’s expected that the law will be found constitutional and states will implement their laws prospectively, most likely between July 1, 2018 and January 1, 2019, but some states may attempt to collect the tax retroactively.

How does the decision affect businesses?

While much of the attention is focused on online retailers, it’s going to impact any business selling products into a state where the business isn’t currently collecting tax, such as wholesalers and manufacturers. Businesses will soon have an obligation to register with states’ departments of revenue, and start collecting and remitting sales tax. It will require businesses to collect sales tax in a lot more states than they are currently.

Brick-and-mortar businesses that also transact with out-of-state customers through a complementary e-commerce portal should pay close attention. They might not have concerned themselves with collecting sales tax on those transactions, but will need a mechanism in place to do so now.

Some businesses might not have software that’s sophisticated enough to comply with all states’ tax laws. Businesses previously could collect tax at whatever rate was imposed where the store was located. Now they’ll need to know the rate and tax treatments for potentially 45 states and numerous local jurisdictions, which is difficult and costly to do manually.

Even if businesses aren’t making taxable sales, they still have documentation requirements to prove that their sales aren’t taxable in a state. Legislation in some states might require businesses to file if they have a certain amount in sales in that state, not just taxable sales, and may be compelled to register and prove that they had no obligation to collect tax. That complicates businesses’ record keeping and adds to their administrative requirements. Other states require that sellers collect tax or report untaxed sales made in the state to both the purchaser and the tax authority. Some impose substantial penalties for failing to file the reports or collect the tax.

What should affected businesses do now?

As soon as possible, businesses need to analyze where they’re making sales, how many sales they’re making and the dollar amount of sales in each state. They could need to register in the states where they are currently not and start collecting tax.

Businesses should also determine how they’ll comply with the law — by upgrading their software system, or more manual methods — and how they’ll remit tax. Will they prepare the returns themselves, or hire a firm or service provider to help with compliance?

Service providers can do more extensive reviews to see where a business needs to file returns, if at all. Businesses might not track activities close enough, which might expose them to liabilities. If that’s the case, there are ways to resolve the outstanding liabilities they have, but didn’t know about until a review was performed.

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